Bond yields fell the most in 13 months, lowering borrowing costs for companies whose profits are being threatened by deflation and the yen’s advance. Today’s action constitutes quantitative easing in the broad sense” said Shirakawa, who earlier today faced demands from government ministers to complement a stimulus package that Prime Minister Yukio Hatoyama will release this week.
The yield on Japan’s five-year bond dropped 7.5 basis points, the most since October 2008, to a four-year low of 0.455 percent. The Nikkei 225 Stock Average closed 2.4 percent higher before the decision was published.
The policy board kept the key overnight lending rate at 0.1 percent, a level that Shirakawa said is already effectively zero, indicating he is unlikely to lower the rate.
The bank also maintained its monthly purchases of Japanese government bonds at 1.8 trillion yen. Analysts expect the central bank to expand the bond transactions eventually.
Japan’s central bank is expanding credit just when others in Asia-Pacific are looking to tighten. The Reserve Bank of Australia today raised interest rates for an unprecedented third straight month to 3.75 percent on mounting evidence that the economy is strengthening.
The world’s second-largest economy expanded at an annual 4.8 percent pace in the third quarter, the second straight expansion after the country’s worst postwar recession. Shirakawa and his colleagues maintained their view that the economy is picking up,” adding that it will keep growing at a moderate” pace until the middle of fiscal 2010.
The move came a month after the bank decided to phase out earlier emergency lending measures, including unlimited collateral-backed loans to banks. Shirakawa said introducing today’s program doesn’t conflict with the expiry of those measures, which were aimed at improving funding for companies.
Unlike the unlimited lending facility, which required private-sector debt as collateral, the bank will accept a wider range of assets including government bonds as well as debt issued by local governments. The program has no time limit.
The measure will further spread the strong effect of monetary easing and encourage a further decline in longer-term interest rates in the money market,” the central bank said.
The government said today the extra budget will fight price declines and the stronger yen. Finance Minister Hirohisa Fujii indicated yesterday that the spending would exceed 2.7 trillion yen, or the amount of money frozen from the previous administration’s budget.
Fujii and Deputy Prime Minister Naoto Kan today said quantitative-easing policies of adding cash to the financial system can support the economy.
The BOJ introduced a form of quantitative easing in March 2001 when it began pumping cash into the reserves that it makes available for banks. It ended that policy in March 2006.
Consumer prices slid 2.2 percent in October, an eighth monthly drop, and the central bank forecasts the declines will extend into fiscal 2011.
The yen’s 11 percent gain against the dollar in the past six months has exacerbated the price slump by driving import costs lower. Today’s program may not be enough to stem those gains, said Bank of Tokyo-Mitsubishi UFJ Ltd.